Restaurants hike prices on Zomato, Swiggy after tax burden increases

Online food delivery startups face a challenge form restaurants after GST payable at eating outlets was cut to 5% from 18% in November 2017, accompanied by the withdrawal of input tax credit (ITC) for restaurant owners. Following the tax cut, restaurants have hiked prices of food items on delivery services, they are also negotiating commission cuts with online delivery services to make up for the additional costs. This development was first reported by Business Standard.

Swiggy, Zomato and Foodpanda provide online delivery services to restaurants at a commission of around 20%, on which they are levied 18% GST. Restaurants can no longer claim ITC on the 18% GST for the input services from these delivery platforms. The tax complication is compelling restaurants to hike prices on their menu, as they face an additional cost burden. “These online food delivery companies have represented for a rate reduction or to allow ITC to restaurants. The matter is being discussed,” a government official told Business Standard.

Swiggy, which caters to more than half the market and delivers 450,000 orders a day, has approached the government for rate reduction to 5%.

A senior executive of a major online food delivery player told Business Standard that they had been under pressure from restaurants to cut margins by 3-4%. Meanwhile, restaurants hiked prices displayed on the platforms on their own. “We do not have an exact number but many restaurants are slowly increasing the prices on online delivery platforms, which is a setback,” he added.

Over 100,000 restaurants partner with online delivery platforms, about 70% of their orders are made through these platforms.

Food ordering space

Swiggy: Founded in 2014, Swiggy has about 35,000 restaurants partners across 14 cities in India. Last month, Swiggy launched a new service called Swiggy POP through which the company offers a curated menu of single-serve meals in the range of Rs 99- 200 from neighbourhood restaurants.

UberEats: Uber recently said that within a year of operations starting from Mumbai in May 2017, Uber Eats has listings from 12,000 restaurants with at least 40 new restaurants being added daily. UberEats which is now available in 13 cities in India is apparently experiencing nearly 50% month-on-month growth, and the number of orders has doubled in the last 3 months. The company said that it will expand the offering in tier 2 markets in the coming month.

Zomato: Food tech major Zomato recently said that in FY18, food ordering brought in nearly 30% of Zomato’s revenue, with the share increasing from close to 18% in FY17. In March 2018, food delivery in India grew by 48% in terms of order volume over the previous month and revenue-wise by 55%. Its food ordering service is functional in 15 Indian cities and 5 cities in the Middle East. In terms of usage, the company said it had nearly 5.5 million monthly food orders in March 2018. In February, Zomato raised $150 million from Alibaba’s Ant Financial.

Ola: In December, Ola bought Foodpanda India from its Germany-based parent Delivery Hero Group and said they that will invest $200 million in the food delivery business. Foodpanda India claims to have around 15,000 restaurant partners across 100 cities in India.